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Brexit: Currency hedging and global equities to the forefront

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UK pension funds and asset managers are considering increasing their currency hedging as the country braces itself for EU exit talks to begin.

While much of the investment-related commentary around the start of the talks has been about taking a ‘wait and see’ tone, consultants told IPE some clients and fund managers were beginning to prepare for a volatile period ahead.

Lennox Hartman, global head of fixed income research at Aon Hewitt, said: “We’ve seen an uptick in interest in currency hedging. Some managers are offering – or thinking about offering – currency-hedged products, and we’ve been speaking to currency overlay managers about how they can fit into portfolios.”

While UK-listed equities have been helped in recent months by the effect of sterling’s decline in value, Aniket Bhaduri, senior investment consultant at JLT, warned that the Brexit talks meant investors could not rely on traditional cyclical expectations.

He said: “Sterling is almost at the end of a nine-year cycle. Normally we would expect it to bounce back, but given Brexit we don’t expect that bounce back because there are no triggers for it.”

Sterling has fallen by roughly 10% against the euro since the EU membership referendum on 23 June last year. It has declined 15.5% against the US dollar.

Bhaduri said JLT had decided to move to an underweight position in UK equities, preferring a more diversified global equity exposure. This thinking was driven more by the outlook for inflation than by specific concerns about Brexit, however.

“The FTSE has been doing very well,” Bhaduri said. “We believe that, in the medium term, because of the pick up in inflation consumer demand is going to get affected. That’s overall going to be a drag on earnings and might be one headwind for the UK.”

Hartman added: “This [Brexit] is a pretty big thing for the UK, but you need to put it in the context of pension fund portfolios being very global.”

He said the end of the scheduled two-year negotiation period was not necessarily a cliff-edge for investors.

“For the most part, in global equity or fixed income indexes the UK is a very small part, so investors can look through that,” Hartman said. “Private equity is the same. Real estate is more domestic, but we’ve had commitments from Asia to keep investing. Some Chinese investors are buying big offices in London.”

Overall, however, the message was to keep Brexit on the agenda, but without making big asset allocation shifts.

Hartman emphasised that “there are lots of questions and no answers”.

“The only thing we know for certain is we have triggered Article 50,” he said.